The much talked-about recovery of the housing market, which has buoyed home sales up from recession lows, has come about through intervention from the Federal Reserve, record low interest rates, and higher home prices that have helped borrowers across the nation improve their financial standing. Both low interest rates and higher home prices have played a role in the housing recovery changes, but as mortgage rates begin to tick upward, housing affordability will decrease, which in turn could cause a pause in the recovery’s progression.
Evidence of an upcoming bump in the road is not yet evident in the numbers. The most recent figures all pointed to a surging recovery: The Department of Commerce reported that sales of new homes rose in May to the highest annual rate since July 2008, while Standard & Poor’s Case-Shiller index of property values showed home prices posted the highest annual gain in more than seven years in April.
But mortgage rates are now rising higher and faster than previously, though there is little precedent for such movement. Between the beginning of May and the end of June, the average interest rate for a 30-year fixed-rate mortgage surged from 3.59 percent to 4.68 percent, according to the Mortgage Bankers Association. Interest rates are now at their highest level since 2011.
Mortgage rates began a swift climb in early May from record low levels, making May the last month that mortgage rates will boost housing affordability above month-over-month and year-over-year levels, reported the National Association of Realtors. But for month of May, the pressure on affordability came from record-high home prices. In all regions across the United States, affordability was down from the previous month. The South experienced the largest month-over-month drop, and the biggest year-over-year drop came in the West.
According to the association’s report, while affordability will certainly weaken in upcoming months, because the metric is coming down from such a high level, affordability should remain historically favorable despite rising mortgage rates and home prices.
A new survey conducted by Fannie Mae showed consumers believe that mortgage rates will continue to increase over the next year. The number of respondents who thought so jumped 11 percentage points from May to hit 57 percent in June, the highest level in the survey’s three-year history. People expecting home prices to increase over the same period also hit a survey high of 57 percent. Only 7 percent believe prices will decline.
“Consumers may recognize that today’s still favorable mortgage rates and home ownership affordability levels will recede over time,” Doug Duncan, senior vice president and chief economist at Fannie Mae, said in a press release. “Given rising home and rental price expectations and improving personal financial attitudes, more prospective homebuyers may be deciding that now is the time to get off the fence.”
It should be noted that an increase in mortgage rates from 3.5 percent to 5 percent is an approximately 15 to 20 percent decrease in what the average home buyer can afford.
Here’s how the major U.S. indexes traded on Thursday:
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